Fight Terrorism With Gas Taxes

By

Randall W. Forsyth

Updated Sept. 12, 2006 11:59 p.m. ET

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OIL PRICES CONTINUED TO SLIDE Monday as the world marked the fifth anniversary of the 9/11 terror attacks.

October crude oil futures fell to $65.54 a barrel, their lowest level since late March, amid signs that Iran might temporarily suspend its nuclear program and that OPEC won't cut production to bolster prices. Since hitting a peak of $78.40 in July, the front-month crude contract has tumbled almost 17%.

Stocks, meanwhile, moved higher with the Dow Jones Industrials adding 20 points, to 11,412.28, despite hits to Dow components
ExxonMobil
(ticker: XOM) and
Alcoa
(AA), in tandem with declines in the oil and metals markets.

But stocks fell in the neighbors of the U.S. to the north and the south. In Canada, the S&P/TSX composite index plunged 213.02, or 1.8%, to 11,656.67 while in Mexico, the IPC stock index fell 0.88% to 20,612.89. The Canadian dollar and the Mexican peso also slumped

The disparate performances of the U.S. stock market and its counterparts on each border demonstrate the difference between being a consumer and a producer of oil.

Indeed, America accounts for fully one-quarter of the world's oil consumption, writes Ed Yardeni, the chief investment strategist for Oak Associates, an investment management firm. Imports comprise more than half -- 58% to be exact -- of U.S. supplies.

There is no question, he adds, U.S. oil imports are "indirectly and inadvertently providing some of the financing of the countries and terror cells who are most hostile to America."

"Arguably, the number one world-class destabilizer is Iran," Yardeni continues. Iran is the world's "most active state sponsor of terrorism," according to the U.S. State Department, bankrolling Hezbollah and Hamas. Saudi Arabian money helps fund Al Qaeda. "Venezuela has become an increasingly destabilizing player in international relations as it seeks the role of the world's leading anti-American gadfly," Yardeni also points out.

It is an unfortunate fact that much of the world's petroleum happens to be located in parts of the world that are unstable, dangerous or overtly hostile to the U.S. and the West. As a result of America's oil addiction, we are funding our enemies.

Ever since the initial oil shock of the 1970s, there have been calls for America to become energy independent. That sounds great, with echoes of 1776 and the Declaration of Independence.

But oil supplies are determined by geology, not politics. As long as modern society is powered by petroleum products, that will continue to be so.

The solutions so far have been elusive. Ethanol may supplement the supply of fossil fuels, but more energy goes into making (corn-based) ethanol than comes out. Hybrid automobiles so far have fallen short of their promise and seem suited mainly to urban driving; at highway speeds, their electric motors are only dead weights.

Now that oil prices are receding, the International Monetary Fund will propose the U.S. use the opportunity to raise gasoline taxes, according to the Financial Times. In most cases, the IMF is the leading purveyor of economic snake oil, but this idea has merit.

The Fund was pushing a higher gasoline tax for environmental reasons, but the main attraction is that, as the FT reported, the proposal caused consternation among OPEC ministers meeting in Vienna. The sheikhs apparently are alarmed that Americans are beginning to shun SUVs for compact sedans with gas prices over three bucks a gallon.

So, far Americans' demand for gasoline has proven to be relatively inelastic; soaring prices have put only a nick into their consumption. Unlike the 'Seventies, when we had to queue up for gas, you can buy all want -- for a price. Now, a gallon of gas actually costs more than bottled water (but less than a latte.)

Europeans somehow deal with gas that costs the equivalent of upwards of five bucks. And they don't drink tap water or bad coffee.

The rule of thumb used to be that a buck-a-gallon tax would yield $100 billion in tax revenues. As gas prices come down, let taxes recapture the savings. The price at the pump is down 40 cents already, so why not put the tax up 40 cents, as a start?

Consumption taxes are inherently regressive, so the money should be used to reduce the most regressive levy of all, the payroll tax. The average American pays as much, or more, in Social Security and Medicare taxes as in income taxes. Those payroll taxes are a major impediment to the working poor getting a leg up on the economic ladder.

If you tax something, you get less of it. Tax gasoline consumption, it will fall and will yield a windfall. Tax employers and employees, and you get fewer jobs. What's the choice?

Following the fifth anniversary of 9/11, enacting a terrorism tax on gasoline would be an apt remembrance. Americans have been at war for the last five years and haven't been asked to make any financial sacrifices. Just make sure the benefits accrue to those who can afford it least. And double the tax for yacht owners.

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